You are correct on the two out of seven years for horse training. However,technically, there is no limit on the years you can claim a
hobby loss. However, if the activity has profits in three of five consecutive
years (or two out of seven for horse training, as you note), the IRS would consider it a business. If not, it may presume that
it is a not for profit activity (a hobby) and attempt to deny the losses. The
taxpayer can still attempt to show that considering the overall facts, it is a
bona fide business.
See http://www.irs.gov/irs/article/0,,id=186056,00.html
for the IRS's definition of Hobby Losses.
If you consider it a business and treat it as a business, go ahead and claim the losses.
